Nonresident Employee Avoids New York Taxes On Deferred Compensation Payment

by Stinson Leonard Street - Employee Benefits & Compensation

A taxpayer we will call John worked for a savings bank in New York that was acquired by Washington Mutual Bank. John participated in the New York bank’s supplemental executive retirement plan (SERP) and its deferred compensation plan, both of which were nonqualified deferred compensation plans. When Washington Mutual Bank acquired the New York bank, the taxpayer retired and began receiving monthly payments for life under the SERP and a year later over a period of 12 years under the deferred compensation plan. John resided in both New Jersey and Virginia but was never a resident of New York. Presumably, however, John worked in New York while he was employed by the bank.

In 2008 Washington Mutual Bank filed for bankruptcy and its assets were sold to JPMorgan Chase (“Chase”). Under a global settlement agreement, Chase did not assume the SERP or deferred compensation plan, but was required to satisfy the obligations under the plans. To that end, in May of 2012, Chase paid John a lump sum distribution representing the present value of the annuity payment under the SERP and the balance in the deferred compensation plan. Chase withheld from the distribution New York state and local estimated taxes. John asked the State of New York for an advisory opinion regarding whether New York state and local taxes should have been withheld from the payments.

Based on federal law, the New York Commission of Taxation and Finance concluded that the amounts would not be subject to New York taxes. Under federal law, states are not allowed to tax retirement income of nonresidents if the payments meet certain criteria. If the payments are from a nonqualified deferred compensation plan, the payments must be made over a period of at least ten years or for life. John’s payments had met those requirements at the time that they began. Of course, those payments quit being lifetime or ten year installments when they were paid in a lump sum after the bankruptcy. The New York Commissioner concluded that the unforeseeable act of Washington Mutual’s filing for bankruptcy should not change the tax treatment of the payments for John. Therefore, John’s payments would not be subject to New York tax and he would be able to get a refund of the amounts withheld.

New York is known as a state that aggressively pursues and taxes nonqualified deferred compensation earned by nonresidents while working in New York. This advisory opinion favors the taxpayer by not asserting New York taxation in a situation in which unforeseeable circumstances resulted in a change in the method of payment. Because the decision is an advisory opinion, only the taxpayer who requested it can rely upon it. Nevertheless, it is helpful authority for taxpayers who structure payments from their deferred compensation plan in order to avoid taxation by a state in which they are not a resident at the time of payment. Other states sometimes look to New York or California for guidance on these issues since those states, with their larger populations, have a more developed body of law on these issues. Taxpayers may have greater confidence that they can move after retirement to a state with low or no income taxes, receive their nonqualified deferred compensation payments over ten years or for life, and avoid taxation by the state where they earned the income even if their chosen payment arrangement changes for reasons beyond their control.

Because this is a state tax advisory opinion, it does not address federal tax issues, such as Internal Revenue Code Section 409A, the tax code section that limits the ability of employers and employees to change the time and form of deferred compensation payments.  The payments in this case began in 2002 and 2003 and 409A does not apply to deferred compensation amounts that were fully vested by December 31, 2004.  Therefore, it is likely that Section 409A did not apply to this acceleration of benefits.  However, employees with deferred compensation subject to Section 409A would also have to consider the impact of that statute on any change in the payment schedule of their deferred compensation.  An employee may be able to avoid the imposition of state taxes from the state in which the deferred compensation was earned, but might still be subject to penalty taxes under Section 409A for having accelerated payment of the benefit.  Employees would want to work closely with their advisers in situations in which deferred compensation payments are proposed to be changed as a result of the employer’s bankruptcy or other financial restructuring.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Stinson Leonard Street - Employee Benefits & Compensation | Attorney Advertising

Written by:

Stinson Leonard Street - Employee Benefits & Compensation

Stinson Leonard Street - Employee Benefits & Compensation on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.